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Central bankers believe that they can provide free lunches

By: Steve Saville, The Speculative Investor

 -- Published: Monday, 20 June 2016 | Print  | Disqus 

A lot of good economic theory boils down to the acronym TANSTAAFL, which stands for ďThere Ainít No Such Thing As A Free LunchĒ. TANSTAAFL is an unavoidable law of economics, because everything must be paid for one way or another. Furthermore, attempts by policymakers to get around this law invariably result in a higher overall cost to the economy. Unfortunately, central bankers either donít know about TANSTAAFL or are naive enough to believe that their manipulations can provide something for nothing. They seem to believe that the appropriate acronym is CBCCFLAW, which stands for ďCentral Banks Can Create Free Lunches At WillĒ.

ECB chief Mario Draghi is the leader in applying policies based on CBCCFLAW. Despite his economic stimulation measures having a record to date that is unblemished by success, he recently launched new attempts to conjure-up a free lunch.

Iím referring to two measures that were announced in March and have just started to be implemented, the first of which is the ECBís corporate bond-buying program (starting this month the ECB will be monetising investment-grade corporate bonds in addition to government bonds). This program is designed to bring about a further reduction in interest rates, because, as we all know, if thereís one thing thatís holding Europe back itís excessively high interest rates, where ďexcessively highĒ means above zero.

Unlike the situation in the US, very little corporate borrowing in Europe is done via the bond market. The ECBís new corporate bond-buying program is therefore unlikely to provide even a short-term boost, but, not to worry, thatís where the ECBís second measure comes into play.

The ECBís second measure is a new round of a previously-tried program called the Targeted Long Term Refinancing Operation (TLTRO). Under the TLTRO program, commercial banks get encouraged ó via a near-zero or negative interest rate ó to borrow money from the ECB on the condition that the banks use the money to make new loans to the private sector.

The combination of the ECBís two new measures is supposed to promote credit expansion and higher ďinflationĒ. In other words, to the extent that the measures are successful they will result in more debt and a higher cost of living. In Draghiís mind, this would be a positive outcome.

In the bizarre world occupied by the likes of Draghi, Yellen and Kuroda, the failure of an economy to strengthen in response to a policy designed to stimulate growth never, ever, means that the policy was wrong. It always means that not enough was done. Itís not so much that these central planners refuse to see the flaws in their policies, itís that they cannot possibly see. They cannot possibly see because they are looking at the world through a Keynesian lens. Trying to understand how the economy works using Keynesian theory is like trying to understand the movements of the planets using the theory that everything revolves around the Earth.

So, the worse things get in response to counter-productive Ďeconomic stimulationí policies, the more aggressively the same sorts of policies will be applied and the worse things will eventually get. This is what Iíve referred to as the Keynesian death spiral.

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 -- Published: Monday, 20 June 2016 | E-Mail  | Print  | Source:

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E-mail: Steve Saville


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